Transports to bears: Ignore fiscal cliff

Michael A. Gayed, CFA, winner of the 2014 Dow Award, is chief investment strategist and co-portfolio
manager at
Pension Partners, LLC., an
investment advisor which manages mutual funds and separate accounts according
to its ATAC (Accelerated Time and Capital) strategies focused on inflation
rotation. Prior to this role,
Gayed served as a portfolio manager for a large international investment group,
trading long/short investment ideas in an effort to capture excess returns. From
2004 to 2008, Gayed was a strategist at AmeriCap Advisers LLC, a registered
investment advisory firm that managed equity portfolios for large institutional
clients. In 2007, he launched his own long/short hedge fund,
using various trading strategies focused on taking advantage of stock market
anomalies. Follow him on Twitter @pensionpartners and YouTube
youtube.com/pensionpartners.

The return of the global melt-up I have made the case for over the past few weeks continues as equities push higher despite continued fears over the fiscal cliff.

I have on numerous occasions argued that the fiscal cliff really does not matter for markets, and that, if anything, it may actually be bullish given that any spending cuts would force bond yields even lower relative to higher dividend-yielding equities (a/k/a the Bear Paradox).

"Wisdom is the reward you get for a lifetime of listening when you'd have preferred to talk."
—Doug Larson

While everywhere you look there is a "Fiscal Cliff Countdown," the real story is the countdown to new all-time highs in the Dow Jones Industrial Average.

Economists have made very compelling arguments with regard to the fiscal cliff as a driver of a 2013 recession. The problem is price does not believe them. Take a look below at the price ratio of the iShares Dow Jones Transportation Average Index
IYT, -0.24%
relative to the Dow Jones Industrial Average
DIA, -0.30%
As a reminder, a rising price ratio means the numerator/IYT is outperforming (up more/down less) the denominator/DIA. For a larger chart, visit https://twitter.com/pensionpartners/status/278860462345580548/photo/1.

Now I know many adhere to Dow Theory as a way of using Transports to predict market trends, but ignore that for now and focus on the October price-ratio low. The move and leveling off of the price ratio indicates that market participants are not aggressively selling off the industry group. Why is this important? Because if the market believed the fiscal cliff would cause an economic slowdown, it would punish companies that ship goods. Instead, the trend of strength may just be getting started.

The fiscal cliff is too hyped, and thus likely too priced into markets to be of any meaningful impact. While the term makes it sound like an event would happen that would instantaneously send the U.S. back into recession, the facts are that it would be more of a process which could likely be countered through central bank action as well as a recovery in overseas developed economies. The kind of rhetoric is at complete odds with the way price is behaving. Things are improving and collateral values are rising, which in turn could result in a surprise pickup in economic activity next year.

Intermarket trends continue to express bullish behavior within the market, as our ATAC models used for managing our mutual fund and separate accounts remain all-in on equities. Treasurys appear to finally be selling off, dividend sectors are in the early stages of weakening, emerging markets are leading, and credit spreads remain healthy. The S&P 500 is on track for its best year since 2009, which since the beginning of the 2012, I said was likely in the face of the negative narrative. The German DAX index is nearing 30% performance for the year. It has been an incredible year, and it ain't over yet.

Fiscal cliff, schmiscal cliff. Listen to price.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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